The Securities & Futures (Investor Compensation - Levy) (Amendment) Rules 2005, which provides for an automatic levy triggering and suspension mechanism, will be gazetted June 30.

The proposed mechanism will reduce the transaction cost to be borne by investors under prescribed circumstances and be conducive to the development of Hong Kong's securities and futures markets.

At present, investor compensation levies are imposed to fund the Investor Compensation Fund. Under the amendment rules, nobody is required to pay investor compensation levies if the fund's net asset value exceeds $1.4 billion.

The current investor compensation levies will be payable again if the fund's net asset value falls below $1 billion, the minimum prudent level which the fund should maintain in order to cover its potential obligations.

Mechanism monitor

The Securities & Futures Commission is responsible for administering the fund and for implementing and monitoring the operation of the levy triggering and suspension mechanism.

The fund's assets should not exceed a prudent amount with annual investment income sufficient to cover its estimated expenditure. As at the end of May, the fund's net asset value was $1.49 billion.

With an asset size of $1.4 billion and estimated annual expenditure of $60 million including the estimated annual compensation payments, the commission estimated the fund would become self-funding if an expected investment rate of return of 4.3% could be achieved in the long run.

Current investor compensation levies are set at 0.002% on securities transactions executed on the Stock Exchange and 50 cents (10 cents for smaller contracts) per side of a contract on futures transactions executed on the Futures Exchange.